Introduction
The Federal Trade Commission (the “FTC”) just adopted a federal regulation banning the creation and enforcement of non-compete agreements or provisions (a “non-compete”) for U.S. workers. Further, the ban requires anyone who previously made a non-compete with a U.S. worker to give that worker a written notice that his or her non-compete is no longer valid. The ban will become effective later in August, 2024 (the “Effective Date”). The ban is extremely broad, and parts of the ban are unclear and will likely be tested in court. Moreover, some lawsuits have already been filed contesting whether the FTC has the authority to issue this ban altogether. Also, this ban was approved by a vote of 3 Democrats to 2 Republicans sitting on the FTC’s board of commissioners, so it is possible that the ban may be administratively revoked if President Biden is not re-elected. In the meantime, if the FTC learns of a banned non-compete, it may file suit against the employer seeking enforcement of that non-compete.
Introduction
The Federal Trade Commission (the “FTC”) just adopted a federal regulation banning the creation and enforcement of non-compete agreements or provisions (a “non-compete”) for U.S. workers. Further, the ban requires anyone who previously made a non-compete with a U.S. worker to give that worker a written notice that his or her non-compete is no longer valid. The ban will become effective later in August, 2024 (the “Effective Date”). The ban is extremely broad, and parts of the ban are unclear and will likely be tested in court. Moreover, some lawsuits have already been filed contesting whether the FTC has the authority to issue this ban altogether. Also, this ban was approved by a vote of 3 Democrats to 2 Republicans sitting on the FTC’s board of commissioners, so it is possible that the ban may be administratively revoked if President Biden is not re-elected. In the meantime, if the FTC learns of a banned non-compete, it may file suit against the employer seeking enforcement of that non-compete.
What’s Banned?
- The ban generally prevents employers from entering into non-competes with their employees and independent contractors (including senior executives).
- The ban prevents an employer from enforcing non-competes except against “senior executives” who were already subject to a non-compete prior to the Effective Date. Thus, a pre-existing non-compete for a senior executive is not prohibited by the ban (but there may be an issue if that pre-existing non-compete is amended after the Effective Date). A “senior executive” is defined as an employee making more than $151,164 per year and who is in a “policy-making position.” A “policy-making position” is a position of final authority to make business decisions for a common enterprise.
- The ban requires employers to deliver written notices to their employees and independent contractors (including senior officers) that his or her non-compete is void (except this notice requirement may not apply to so-called “senior executives”). However, there is not specific deadline for providing this written notice.
- The ban prevents employers from representing to their employees and independent contractors that they are subject to a non-compete, except this prohibition does not apply to “senior executives” who were already subject to a non-compete prior to the Effective Date.
Technically, What’s a Non-Compete?
A non-compete is a “contractual term or workplace policy” (written or verbal) that prohibits or penalizes a “worker” for:
- seeking or accepting work in the U.S. with someone other than the employer where that work would begin after the worker’s conclusion of employment with the employer; or
- operating a U.S. business after the worker’s conclusion of employment with the employer.
A key element of this “non-compete” definition is the existence of a written or verbal “contractual term or workplace policy.” If no “contractual term or workplace policy” can be proven, then an employer may still be free to sue a worker who breaches a duty of loyalty or a fiduciary duty owed to his or her employer if that worker competes with the employer while still employed by that employer or that worker misappropriates the employer’s trade secrets or proprietary information.
A “worker” is anyone who works (or previously worked) for the employer, regardless of whether he or she was paid or unpaid and regardless of how or whether the worker is categorized as an employee or independent contractor under other federal or state laws. However, a “worker” does not include a natural person who is a franchisee in a franchisee-franchisor relationship, but this exclusion from “worker” status does not apply to natural person who works for a franchisee or franchisor. Thus, this exclusion from “worker” status would only apply to a natural person who was named as a franchisee in the franchise agreement.
When Does the Ban Not Apply?
Given the definition of a non-compete, the ban does not necessarily prevent an employer from entering into other carefully crafted restrictive covenants (such as non-disclosure agreements or non-solicitation agreements), provided those other restrictive covenants are not so broad as to act like a non-compete that prohibits or penalizes the worker from switching jobs or starting a new business.
The ban expressly says doesn’t apply (i) in connection with the sale of the employer or the employer’s business; (ii) in case of senior executives, the ban cannot be enforced after they terminate their employment; (iii) lawsuits involving a non-compete that was pending as of the Effective Date; and (iv) enforcement of, or a representation about, a non-compete is not prohibited where the employer has a good-faith basis to believe the ban is inapplicable.
State statutes, regulations, orders and common law are not superseded by the ban to the extent they don’t conflict with the prohibitions and notice requirements noted above. This appears to leave room for asserting that trade secrets laws still apply, and that duties of loyalty and fiduciary duties may still somewhat apply in employment relationships or among the co-owners of a business organized as a corporation, partnership or limited liability company, depending on the pertinent facts of a given situation.
What Now?
As first noted above, the pending court challenges and the next Presidential election may determine the fate of the FTC’s non-compete ban. Accordingly, a worker choosing to ignore his or her non-compete may be taking a legal risk if that non-compete is retroactively enforced because the ban is later lifted or declared legally invalid. If a lifting of the ban, or court order removing the ban, is not retroactively applied, the effected worker may still need to be concerned about any unexpired term remaining on his or her non-compete.
Chris Goodrich, Partner [email protected].